Innovation: Still full of ideas, but not making jobs

America needs to share the benefits of innovation more widely

Apr 28th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] THE economy is recovering, yet American confidence remains mired at levels more commonly seen in recessions. For that blame unemployment, petrol prices and a deeper, nagging feeling that America is in decline. A Gallup poll in February asked Americans to name the world’s leading economic power. By a significant margin, they said China.

Barack Obama has exploited this anxiety. America, he has said, faces a new “Sputnikmoment” and must “compete for the jobs and industries of our time” by spending more on research, education and infrastructure. But the notion that America is on the verge of being vanquished by cleverer, more innovative competitors is flawed. First, competitiveness is a woolly concept that wrongly supposes countries, like football teams, win only when another team loses. But one country’s economic growth does not subtract from another’s. Second, America’s ability to innovate and raise productivity remains reasonably healthy. The problem is that the benefits of that innovation and productivity have become so narrowly concentrated that workers’ median wages have stagnated.

Towards the end of the last decade American productivity began to slump, a sign to some that the pay-off from new information technology had largely been exhausted. But coming out of the recession productivity surged; it rose by 3.9% last year, the fastest rate since 2002. This was largely cyclical, since business output has recovered more quickly than hiring. Long-term productivity growth will be more modest, and its rate will depend on investment, human capital and innovation.

After collapsing during the recession, investment in business equipment has bounced back, rising 17% in the last quarter of 2010 from the figure a year earlier. Human capital is more of a challenge. Americans once led the world in educational attainment, but this is now barely rising while other countries have caught up (see article). That is a key reason why Dale Jorgenson, an economist at Harvard University, reckons overall productivity growth will average 1.5% in the coming decade, down from 2% in the previous two.

Innovation is what preoccupies Mr Obama. He worries that the next breakthroughs in energy, transport and information technology will occur elsewhere.

America’s credit rating: Wakey, wakey

Standard & Poor’s may not have said anything new. That’s no reason for American politicians to ignore it.

Apr 20th 2011 | from the print edition

[Greg Ip] CREDIT-RATING agencies are notorious for announcing with great fanfare what has been obvious to financial markets for months. That may explain why investors were only briefly perturbed when Standard & Poor’s (S&P) issued its first warning in 70 years that America’s credit rating was in jeopardy because of its public debts. Share prices lurched downwards but soon stabilised. Bond yields actually declined.

It is easy to think of other reasons to shrug shoulders. S&P did not lower America’s top-tier AAA rating on April 18th; it assigned it a negative outlook—a threat that if debt remains on its present course, a downgrade will ensue. It puts the chances at one in three. Changes in ratings are usually lagging indicators, following rather than causing economic hardship. Moody’s stripped Japan of its AAA rating in 1998; S&P followed in 2001. Further downgrades have come since. But despite the rich world’s heaviest debt burden, Japan still borrows at rock-bottom rates, thanks to deflation and the loyalty of its savers.

True, America depends more than Japan on foreign lenders. But it is not, as some claim, a few steps behind Greece on the road to fiscal ruin. Greece has a greater debt burden, a history of default and book-cooking, and no control over the currency in which it borrows. America has stable, transparent institutions and issues the dominant reserve currency. Many investors would have to hold US treasuries even at a lower rating; and the bonds’ appeal has if anything been enhanced this week by discussion of Greek default (see article). Most investors care less about America’s credit rating than about its low underlying inflation, loose monetary policy and oddly weak economic growth (seearticle). They also believe that its policymakers will eventually find the political will to bring the government’s deficit under control. Haven’t they always?

The danger that this time they might not is why S&P’s declaration should not be dismissed out of hand.

The credit-rating outlook: A warning shot

S&P’s bombshell means more politically than economically

Apr 20th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

SCEPTICS have wondered how long America could use its control of the world’s reserve  currency as an excuse to rack up huge debts. Now they may have their answer. On April 18th Standard & Poor’s (S&P), a credit-rating agency, said it had lowered the outlook for America’s AAA credit rating, the highest, to negative.

Many rich countries have seen their debts and deficits balloon in recent years. According to S&P’s own calculations, America’s net debt of all levels of government, at 75% of GDP, is in the same range as the net debts of Germany, France and Britain, all rated AAA (see chart). But those countries, S&P frets, “are all now doing more about it” than America is. The agency had briefly put Britain’s rating on negative outlook, but lifted it when the coalition government swung towards austerity. The prospects of America following suit, says S&P, are hobbled by the fact that Republicans and Democrats cannot agree on how to tackle the deficit.

Republican economics: The rise of the anti-Keynesians

Paul Ryan’s intellectual hinterland

Apr 14th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] WHEN Republicans proposed slashing billions of dollars from federal spending this year, Democrats circulated predictions by economists that jobs and growth would be hit. John Boehner, the Republican speaker in the House of Representatives, countered with an economic expert of his own: John Taylor of Stanford University. “Nothing could be more contrary to basic economics, experience and facts,” Mr Taylor asserted on his blog, which Mr Boehner cited. By cutting government spending, he said, the Republicans would “crowd in” private investment and create jobs.

Mr Taylor, a prominent monetary academic, served under both George Bush senior and junior and advised John McCain during his presidential campaign. In the past few years he has become a strident and prolific critic of the monetary and fiscal stimuli deployed by the Federal Reserve and the Obama administration respectively, views that have received a warm welcome from House Republicans. For if there is one ideology that unites today’s Republicans, it is Keynesianism, whose nefarious influence they are determined to stamp out. “Young Guns”, the book-sized manifesto of Eric Cantor, Kevin McCarthy and Paul Ryan, leading Republican House members, devotes several pages to the evils of Keynesian activism and its exponents in the administration.

Jobs figures: a gentle tailwind

Employment is moving, ever so slowly, in Barack Obama’s direction

Apr 7th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

ON APRIL 4th Barack Obama announced, to no one’s surprise, that he would seek a second term in 2012. The timing was auspicious. Three days earlier the job market, a key determinant of his re-election chances, took a turn for the better. On that day the government reported that non-farm payrolls rose a hefty 216,000, or 0.2%, in March, led by manufacturers, hotels, restaurants and temporary staffing agencies. Strapped state and local governments trimmed their payrolls for the fifth month in a row. But private payrolls, a better indicator of the economy’s animal spirits, have posted their biggest two-month advance since 2006, at 470,000.

Meanwhile, the unemployment rate fell to 8.8% from 8.9%. It has now plummeted a full percentage point in four months, a feat unmatched since early 1984 and a fact Mr Obama made sure to point out. No doubt he hopes it augurs for him what it did for Ronald Reagan in 1984. Like Mr Obama, Mr Reagan endured a savage recession early in his first term that crushed his approval ratings and cost his party seats in the mid-terms. But by 1984 job creation was on a roll and Mr Reagan romped to re-election.